Inflationomics

Working Outside the “System”

As interest rates go negative, savers have less incentive to save and everyone has less incentive to stay within the unrewarding “system.”  The “system,” of course, means the Federal Reserve System of banking in the United States and its currency, the U.S. dollar.  Sure, people can borrow U.S. dollars more cheaply, but at some point they’re going to ask how much these dollars are worth if they don’t pay any interest and they don’t cost anything to manufacture.  You might object, saying that the U.S. dollar is stronger than other currencies, but that just means that other currencies are losing purchasing power more quickly than the U.S. dollar.  In the long run, how much can a currency be worth if it can’t be used to earn interest, and it doesn’t cost anything to manufacture?

So what is a person supposed to use?  Other currencies don’t pay much interest either.  Gold and silver don’t pay any interest.  In a world without interest (time preference) everything tends toward the here and now.  The people who have something now are in the driver’s seat.  Young people starting out with little or nothing will have a harder time to get somewhere.  Perhaps partnerships between energetic young people and wealthy older people will become more popular…like sharia compliant finance, where banks partner with “borrowers” because charging of interest is prohibited.

Others may turn to barter, assuming they can find things with which to barter.  I recently had an auction to get rid of some stuff I had collected in my warehouse during the past 23 years (stuff expands to fill the space available, you know). Much to my surprise, there were perfectly good things that didn’t even sell for $1.00.  But when I put them out along the curb with a “free” sign next to them, they disappeared quickly.  So, there’s plenty of stuff out there with which to barter, but is it worth anything if no one wants it for $1.00?  Of course, the problem with barter is that you might not find someone with the goods you want and/or he/she might not want the goods you have to offer.  Oft times, when barter becomes necessary, people will adopt a de facto currency such as sugar, bullets, or even cigarettes, if the government’s currency is totally mismanaged.

Gold and silver still have some value.  In fact, their prices have recently risen.  Perhaps the people with gold and silver will be able to purchase goods when the U.S. dollar fails to function as a medium of exchange.  In any event, there will be an interesting tax question for the Internal Revenue Service (IRS) to resolve because of the legal tender laws in the United States.  Let’s assume you have $1,000 face value silver dimes (pre-1965) and you want to pay your taxes with them.  The IRS will accept them at their face value of $.10 each.  In the market place, however, you may have to pay $1.00 per $.10 to acquire them.  So, if you purchase a house with them, are you paying $10,000.00 or $100,000.00 for the house?  If you acquired the dimes at $.10 each, and you used them to purchase the house, can the IRS argue that the dimes are worth $.10 when used to pay taxes, but are worth $1.00 when used to purchase the house?  Don’t know.  Let’s assume you can purchase the house for the face value of your dimes ($10,000.00), when it comes time to sell it, do you have to receive payment with silver dimes, or could you trade the property for another property (IRC Section 1031), thus maintaining the old basis in the property, or do you have to die with it in your estate and let your heirs inherit it with a stepped-up basis, tax free?  Don’t know…ask your tax consultant.  By the way, the same question arises when using Silver Eagles ($1.00 face value) and $20.00 double eagles, which are also “legal tender,” for the purchase of anything.

Another, more modern way of skirting the “system” is to use a crypto-currency like bitcoin for your purchases.  As long as the internet is working, this may be a way to store your savings, but, so far, you’ll be limited in what you can purchase with them, not to mention how quickly you can purchase it, as their “system” recently experienced an overload, making transactions slow.

Back when Zimbabwe was going through its hyper-inflationary period, people switched over to using South African Rands, U.S. dollars, and gold.  So I suppose, people in the United States might theoretically use some other currency, but I don’t see it as being available in adequate quantities…at least not in physical form, which is what is needed for everyday use by most people.  Physical U.S. dollars might not even be available in adequate quantities since everything nowadays is based on credit.

Scrip is another possible way around using a currency, for a short period of time.  While scrip, or I.O.U.s, have traditionally been used by governments, there’s no reason they couldn’t be used by corporations or even individuals.  It’s basically an agreement to pay “something” at some point in the future.  It may work under certain limited circumstances.

The bottom line is that we’re getting closer to the time when the “System” will break down, and alternatives will be required.  Different answers are better for different people, but, in my opinion, gold and silver, land, food, and water sources are becoming ever more important for the time when the system fails and chaos ensues.  Get ready now.

Robert F. Sennholz

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